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No Tax Exemption for Concessional or Interest-Free Loans from Employers, Rules Supreme Court

Understanding the Tax Implications of Concessional Interest Rate Loans for Bank Employees

Employees who receive loans at a concessional interest rate from their employers are required to pay income tax, leading to a significant impact on their tax outgo. This practice is especially prevalent in banks, making bank employees the most affected group due to this rule. The recent decision by the Supreme Court has rekindled discussions surrounding the taxability of concessional or interest-free loans availed by bank employees. Let’s delve deeper into the implications of this decision and how it affects employees.

Challenging the Constitutional Validity

The All India Bank Officers Confederation contested the constitutional validity of the income tax rule that imposed tax on loans given to employees at a concessional interest rate. Despite their efforts, the Supreme Court upheld the validity of the rule, deeming it to impact a large number of employees who receive loans at a concessional interest.

Impact on Tax Outgo

The Supreme Court’s judgement confirmed the taxation of interest-free or concessional loans given by banks to their employees as ‘fringe benefits’ and ‘perquisites’ under Section 17 of the Income Tax Act, 1961. As a result, the difference between the interest rate charged by the bank and the prime lending rate of the State Bank of India (SBI) is taxable as a perquisite.

Calculating the Taxable Perquisite Value

The taxable perquisite value is calculated as per Rule 3(7)(i) of the income tax rules. This rule is applicable for bank employees and determines the taxation of interest-free or concessional interest loans as perquisites. To illustrate, if an employee avails a loan at a concessional interest rate from the bank, the difference in interest rate between the loan and the SBI’s prime lending rate is considered as the taxable perquisite.

ParticularsAmount
Maximum outstanding balance (i.e. aggregate outstanding balance for each loan as on the last day of each month)…ARs 50,00,000
Prime lending rate charged by SBI as on the first day of the relevant financial year in respect of loan for the same purpose advanced by it…..B15%
Loan interest to be charged from others….C=(A)*(B)Rs 7,50,000
Actual interest rate charged from employee (Rs 50,00,000*6.15%)…..DRs 3,07,500
Taxable value of perquisite (C-D)Rs 4,42,500
Savings Despite Tax Implications

Notably, even with the tax payable on concessional interest rate loans, bank employees may still end up saving money under certain conditions. The Supreme Court’s ruling does not comment on whether banks will cease offering concessional interest rate loans to employees, as this falls under the purview of the Reserve Bank of India.

Exceptions to Taxability

Under the Income-tax rules, there are exceptions where the loan availed at a concessional rate by the employee from the employer is not taxable. These include cases where the loan is used for medical treatment for specific diseases as per rule 3A, or when the aggregate amount of original loans does not exceed Rs 20,000.

In conclusion, the recent Supreme Court judgement has significant implications for bank employees availing concessional interest rate loans, introducing tax implications that need to be considered when opting for such loans.

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2024